CHAPTER 3 : THE PROMISE OF GROWTH: A “DIFFERENCE-INDIFFERENCES” ANALYSIS OF THE ECONOMIC IMPACT OF SWITCHING DIPLOMATIC RELATIONS BETWEEN TAIWAN AND CHINA
Jinji Chen (CTBC Business School)
Ling-Yu Chen (Tamkang University)
Abstract
This chapter is the quantitative component for the research project on the economic impact of diplomatic engagement with Taiwan and China. We apply the Difference-in-Differences (DID) approach to investigate whether an event that occurred in a certain year leads to better or worse economic performance – be it the severance of diplomatic ties with Taiwan in exchange for the recognition of China, or the launch of significant Chinese investment programs in the region. According to our empirical results, South Africa's economy did not improve after it cut ties with Taiwan in 1998. Croatia, the Czech Republic, Hungary, Montenegro and Slovenia also did not perform better economically, relative to Turkey, after the launch of China’s 16+1 initiative, which excluded Ankara. Results from Latin America and the Caribbean also cast doubt on Beijing’s assertions that the Belt and Road Initiative (BRI) brings great economic benefits to its partners. In Oceania, Tonga, which switched recognition to China in 1998, has still not shown stronger economic performance than neighboring countries, while Taiwan’s partner, Tuvalu, has enjoyed positive economic growth relative to its control country.
Taiwan’s diplomatic isolation began when it lost its right to the "China seat" at the United Nations in 1971 and was replaced by the People's Republic of China (PRC). It lost the recognition of over four dozen countries, including the US, in the years that followed, and has more recently suffered further setbacks. Seven countries cut diplomatic ties in the period from 2016 to 2019: Sao Tome and Principe, Panama, Dominica, Burkina Faso, El Salvador, the Solomon Islands, and Kiribati. In December 2021, Nicaragua also cut diplomatic ties and switched recognition to Beijing. The rapid rise of China’s political and economic strength has been a decisive factor in these losses. But Taiwan is still working hard to participate in international organizations, such as the World Health Organization (WHO). It aims through trade, investment, tourism and technological exchanges to send a message to the world that “Taiwan can help”.
This chapter aims to provide the empirical foundation to assess the impact of having diplomatic relations with Taiwan or China and provide results for further analytical examination. It is aided by additional data and observations in the region-based chapters 2 that follow. We apply the Difference-in-Differences (DID) approach, an econometric technique developed by Card and Krueger (Card & Krueger, 1994), to implement datadriven comparative case studies. Under the DID framework, we investigate whether an event that occurred in a certain year – be it a severance of diplomatic ties with Taiwan in exchange for recognition of China, or the launch of Chinese investment programs in the region – leads to better or worse economic performance. The variable, GDP per capita in log form, was sourced from the United Nations (UN) Data for Oceanian countries and the World Bank’s World Development Indicators (WDI) for Africa, Latin America and the Caribbean (LAC), and Central and Eastern Europe (CEE). The data are complete until 2019. The global outbreak of COVID-19 in early 2020 had such a global economic impact that data from 2020 are more volatile.
Introduction
